Thermo Fisher Scientific Inc (TMO) — Q4 2020 Earnings Call Transcript

Good morning and thank you for joining us. On the call with me today is Marc Casper, our Chairman, President and Chief Executive Officer; and Stephen Williamson, Senior Vice President and Chief Financial Officer. Please note, this call is being webcast live and will be archived on the Investors section of our website thermofisher.com, under the heading Webcasts and Presentations until February 12, 2021. A copy of the press release of our fourth quarter 2020 earnings is available in the Investors section of our website under the heading Financial Results. So, before we begin, let me briefly cover our Safe Harbor statement. Various remarks that we may make about the company's future expectations, plans, and prospects constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the company's most recent annual report on Form 10-K and subsequent quarterly report on Form 10-Q, which are on file with the SEC, and also available on the Investors section of our website under the heading SEC Filings. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change. Therefore, you should not rely on these forward-looking statements as representing our views as of any date subsequent to today. Also, during the call, we'll be referring to certain financial measures not prepared in accordance with Generally Accepted Accounting Principles or GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is available in the press release of our fourth quarter 2020 earnings, and also in the Investors section of our website under the heading Financial Information. So, with that, I'll now turn the call over to Marc.

Thanks, Ken. Good morning, everyone. Thank you for joining us today for our 2020 fourth quarter call and a wrap up of what's been a truly exceptional year for Thermo Fisher Scientific. I hope that you and your families are staying healthy as we all work to get beyond the pandemic. Before I cover many of the highlights from the quarter and the year, I want to share some news about our Investor Relations team. This will be Ken's last earnings call as he plans to retire at the end of March. You've all come to know Ken very well over the years. He's been leading the IR function since 2005 and is concluding a remarkable 25-year career at Thermo Fisher. Ken has been the voice of our company to the street, and he excels in that role. He conveys his extensive knowledge of our company, our markets, and our opportunities in a way that's informative and engaging. In fact, you voted Ken the best IR professional in our industry multiple times over the years. And I couldn't agree more. He's been a terrific partner to me and Stephen. Ken, thank you for a truly stellar contribution to Thermo Fisher. Looking ahead, we're very fortunate to have Raf Tejada here to take the reins in March. Raf has been a part of the Thermo Fisher Investor Relations team for five years, and many of you knew him during his time on Wall Street, most recently at Bank of America as an analyst supporting Derik de Bruin. I know Raf and the team will carry forward Ken's legacy of excellence in Investor Relations. Please join me in congratulating Raf on his new role and wishing Ken all the best in his well-deserved retirement. So moving on to our results for 2020, an unprecedented year by any measure. I'm pleased to report that we delivered the strongest year in our company's history that speaks to the incredible work of our 80,000 colleagues around the world. Through their tireless efforts, we led the industry in supporting our customers globally, enabling the societal response to the pandemic. We delivered outstanding results by working with speed at scale to meet our customers’ evolving needs. This included generating $6.6 billion of COVID-19 response revenue and quickly returning the base business to growth after the disruption seen across the globe earlier in 2020. The strength of our response activities allowed us to significantly accelerate investments in our company to create an even brighter future with a focus on talent, R&D, and new capabilities and capacity. We also generated significant free cash flow during 2020, and we're good stewards of capital, creating shareholder value through share buybacks and dividends, building a strong M&A pipeline, and reducing our net debt. I'll share some of the many highlights from the quarter and the year later in my remarks. But first, I'll cover the financials at a high level. Starting with the quarter, our revenue grew 54% in Q4 year-over-year to $10.55 billion. Adjusted operating income increased 107% to $3.51 billion, and our adjusted operating margin expanded 840 basis points in Q4 to 33.3%. Finally, adjusted EPS increased 100% to $7.09 per share in the quarter. Turning to our results for the full year, we grew revenue by 26% to $32.22 billion in 2020. Adjusted operating income increased 60% to $9.56 billion. We expanded our adjusted operating margin by 630 basis points to 29.7%. And we delivered a 58% increase in adjusted EPS to $19.55 per share. Both our fourth quarter and full year financial performance were truly exceptional on all metrics and demonstrate the strength of our growth strategy and our ability to move with speed at scale in responding to rapidly evolving customer needs. Let me now turn to our end markets and give you some color on our performance for the quarter and the year. Starting with pharma and biotech, we had outstanding performance again in this end market, delivering approximately 25% growth during Q4. We saw very robust growth across all businesses serving these customers, particularly in bioproduction, pharma services, biosciences, and our research and safety market channel. Our Q4 results capped off an excellent year of growth in the mid-teens. Our strong performance has been driven by our leading role in supporting our customers across a wide range of exciting therapeutic areas, including our significant role in supporting COVID-19 vaccines and therapies. In academic and government, we grew in the high single-digits in the quarter as customers across the globe ramped up activity. We saw good growth across a range of our businesses, particularly chromatography and mass spectrometry, and our research and safety market channel. Similarly, in industrial and applied, the team’s strong execution helped us return this end market to growth in Q4. We grew in the low single-digits during the quarter, and it was good to see our electron microscopy business return to growth. Given the significant impact of the pandemic on customer activity earlier in 2020, both the academic and government, and the industrial and applied end markets declined in the mid single-digit growth for the full year. Finally, in diagnostics and healthcare, we had another incredible quarter, delivering more than 200% growth. Our COVID-19 testing revenue continued to accelerate in the quarter as customer demand for our sample preparation, PCR solutions, and viral transport media remained very robust. For the full year, diagnostics and healthcare grew by more than 100%, driven by our leading role in supporting COVID-19 testing around the world. Our outstanding performance was the result of having the right technologies and the ability to rapidly scale up manufacturing which was enabled by our PPI Business System. As I think back to this call a year ago and how quickly conditions evolved during the year, I'm humbled by the incredible impact our team had in navigating the environment while supporting so many aspects of the pandemic response. As a reminder, early in the year, our cryo-electron microscopes were used by researchers to create the first 3D image of the virus. We were a critical supplier of PPE, leveraging our strong channel relationships to secure these products when supplies were scarce. We enabled COVID-19 testing at an unprecedented level, creating a market-leading molecular diagnostics business in just a few months to support hundreds of millions of PCR tests around the world. And as you know, we've built trusted relationships with the pharma and biotech industry over many years and have provided them with the right set of products and services. As a result, these customers engage with us on a significant number of projects to help develop and produce vaccines and therapies. In 2020, this led to $500 million in COVID-19 vaccine therapy revenue, and we expect that to increase to $1 billion in 2021. Our comprehensive response to the pandemic demonstrates the unique capabilities of Thermo Fisher Scientific. Now let me turn to a business update framed by our growth strategy and highlight just a few of our many achievements. As a reminder, there are three pillars to our growth strategy. First, we're committed to high-impact innovation. Second, we leverage our scale in high-growth and emerging markets. And third, we deliver a unique value proposition to our customers. Starting with the first pillar, it was an extraordinary year of high-impact innovation. In response to the pandemic, we established worldwide leadership in COVID-19 testing. We quickly developed and gained regulatory approval to launch the TaqPath COVID-19 combo kit in March, providing a gold standard PCR-based test for our customers at a scale our industry has never seen before. We also significantly expanded our portfolio of COVID-19-related products, including our Amplitude solution for high-throughput PCR-based testing and our TaqCheck PCR test for asymptomatic health surveillance. In addition, we launched a number of highly innovative products across our base business to strengthen our leading positions in analytical instruments, biosciences, and bioproduction. For example, in mass spectrometry, we extended our industry-leading Orbitrap franchise with new generation Exploris mass spectrometers. In our electron microscopy business, we launched two Selectris imaging filters for our cryo-electron microscopes. And in Q4, we introduced the Tundra cryo-electron microscope. These are just some of the examples of how we're continuing to expand the benefits of this groundbreaking technology and democratize its use. The second pillar of our growth strategy is leveraging our scale in high-growth and emerging markets. Our actions in the region are a great example of how our ongoing investments and the differentiated customer experience we've created position us to further capitalize on the significant growth opportunities available. In China, we further accelerated from our strong Q3 results, growing 30% in Q4. To continue to strengthen our presence in China and support the local biotech industry, during the year, we localized the manufacturing of single-use bioproduction technologies at our Center of Excellence in Suzhou. And in the quarter, we announced the formation of a joint venture to establish a biological drug development and manufacturing facility in Hangzhou. Lastly, I want to touch on the third pillar of our strategy, our unique customer value proposition. Entering 2021, our relationships with customers and governments around the world have never been stronger. Let me give you some examples. When the pandemic hit, we were uniquely positioned to help our pharma and biotech customers develop and eventually produce COVID-19 vaccine-related therapies and vaccines because of the trusted relationships we've built over many years. We quickly moved and invested significantly in our infrastructure, scaling up to support the volumes needed while adding capabilities for new modalities such as mRNA. The broad and fast response helped deepen our already strong customer relationships, and this positions us incredibly well to help them with their near-term COVID-19 needs as well as the longer-term needs for future vaccines and therapies for other diseases. Throughout our extensive work in molecular diagnostics, clinical labs now have an even greater appreciation of our leading offering in specialty diagnostics. We've dramatically increased our PCR and sample preparation instrument installed base, and our customers have seen how strong a partner we are in addressing their needs. Bringing this all together, we execute our proven growth strategy using our PPI business system that enables our teams to operate with speed at scale and was a key differentiator in our success last year. PPI is our operational discipline and enables us to translate top-line growth into strong growth in earnings and free cash flow. We entered 2020 with excellent long-term growth prospects as a company. The way we executed for our customers throughout the year further unlocked our growth potential, which will benefit us in 2021 and beyond. Let me give you some color on the increased investments we were able to make because of our strong performance. In innovation, we ramped up our R&D investment by approximately 20% to $1.2 billion. In emerging markets, we expanded our localized capacity and capabilities to further advance our leadership. And to enhance our unique customer value proposition, we invested significant capital expenditures in our high-growth bioproduction, pharma services, and biosciences businesses, as well as in commercial capabilities to further differentiate the customer experience. In total, last year, we invested an additional $1 billion to accelerate our long-term growth, roughly half in capital expenditures and half in P&L investments. These actions, combined with the substantial investments planned for 2021, will position our company for a very bright future. Turning now to capital deployment. We have a strong track record of creating value for our shareholders, and we continued to execute our strategy in 2020. During the year, we returned a total of $1.8 billion in capital to our shareholders through share buybacks and a growing dividend. As you know, we announced several strategic bolt-on acquisitions. In our Pharma Services business, we entered into a strategic partnership with CSL to expand our biologics capacity for this rapidly growing market. We acquired Phitonex to enhance our flow cytometry offering for cell analysis. Shortly after year-end, we acquired the European viral vector manufacturing business from Novasep. We signed an agreement to acquire Mesa Biotech to enhance our PCR-based diagnostics, adding gold-standard technology in a rapid point-of-care testing format. We ended 2021 with a very strong balance sheet and an active deal pipeline. As always, we'll continue to apply our disciplined approach to opportunities and continue to be good stewards of our capital. Before I turn to guidance, 2020 was also a significant year of progress in terms of environmental, social, and governance priorities. We've always been a company that's focused on having a positive impact on the world. That's the true embodiment of our mission, which is to enable our customers to make the world healthier, cleaner, and safer. I'll highlight a couple of the initiatives that are having a big social impact. One is that we launched and significantly funded the Thermo Fisher Foundation for science, expanding our STEM education programs to benefit underserved communities. Another is that we established the Just Project, a collaboration with historically black colleges and universities where we've invested in a COVID-19 testing program, allowing students and faculty to safely return to campus. I'm proud of these and the many steps our teams are taking to make a difference in our communities around the world. Taking a step back and reflecting on the year as a whole, by all measures, we delivered an outstanding year. Now looking ahead to 2021. Stephen will outline the assumptions that factor into our revenue and earnings guidance, but let me quickly cover the highlights. In terms of our revenue guidance, we expect to deliver $35.1 billion in 2021, which would result in reported revenue growth of 9%. We're initiating adjusted EPS guidance of $21.62 per share for the full year. That's 11% growth year-over-year and a continuation of our outstanding track record. Before I hand the call over to Stephen, I'll leave you with my key takeaways for the year. The success of our growth strategy clearly sets us apart as the unrivaled leader in our industry. 2020 truly demonstrated the power of who and what we are as a company. During a unique time of need, we stepped up for our customers, enabling their important contributions to society and helping them navigate the recessionary impact of the pandemic. As a result, we were able to gain significant market share and solidify Thermo Fisher as their partner of choice. At the same time, we stayed focused on driving strong returns from existing investments and made additional investments to accelerate our future growth. While I'm very proud of our accomplishments during the past year, I couldn't be more excited about our opportunities in 2021 and beyond. With that, I'll now hand the call over to our CFO, Stephen Williamson.

Thanks, Marc, and good morning, everyone. I'll begin with a high-level summary of our Q4 performance and full year results for the total company. Then I'll provide some color on our four segments and conclude with comments around our initial 2021 guidance. As you saw in our press release, we achieved an exceptional quarter and grew organically by 51% in Q4. This resulted in full year organic growth of 25%. Similar to previous quarters, I'll break down the organic growth into two elements. The first is the performance of the base business, and the second is the scale of the COVID-19 response revenue. In Q4, the base business grew 5% organically, another quarter of sequential improvement. For the full year, the base business was essentially flat as a result of slower economic activity earlier in the year due to the pandemic, partially offset by great commercial execution. Our COVID-19 response revenue also increased significantly in the fourth quarter to $3.2 billion, bringing the full year impact for our customers to $6.6 billion. This was largely driven by testing-related products and instruments. It is also worth noting that we generated $500 million of revenue in 2020 from support for COVID-19-related vaccines and therapies. Once again, our PPI Business System enabled excellent pull-through, and we delivered 100% growth in adjusted earnings per share in Q4 and 58% for the full year. Our PPI Business System also enabled us to generate extremely strong cash flow. Free cash flow for the year was $6.8 billion, up 67% versus the prior year. Overall exceptional financial results in 2020. Let me now provide you with some more details on our performance, starting with our Q4 earnings results. As I mentioned, we grew adjusted EPS by 100% to $7.09. For the full year, adjusted EPS was $19.55, up 58% compared to last year. GAAP EPS in the quarter was $6.24, up 151% from Q4 last year. And 2020 full year GAAP EPS was $15.96, up 74% versus the prior year. On the top line, our Q4 reported revenue grew 54% year-over-year. The components of our Q4 reported revenue increase included 51% organic growth and a 3% benefit from foreign exchange. For the full year 2020, reported revenue increased 26%. This includes a 25% contribution from organic growth and a 1% tailwind in foreign exchange. Turning to our growth by geographies. During the quarter, all regions delivered very strong growth. North America grew just over 65%; Europe grew approximately 50%; Asia Pacific grew approximately 20%, including China, which grew 30%; and the rest of the world grew approximately 50%. For the full year, North America grew just over 30%, Europe grew over 25%, Asia Pacific grew 5%, and the rest of the world grew approximately 45%. Turning to our operational performance. Q4 adjusted operating income increased 107%; and adjusted operating margin was 33.3%, 840 basis points higher than Q4 last year. For the full year, adjusted operating income increased 60% and adjusted operating margin was 29.7%, which is 630 basis points higher than 2019. In the quarter and for the full year, our PPI Business System enabled us to drive exceptional volume leverage, and we also had favorable business mix. This was partially offset by strategic investments across all of our businesses to support our near- and long-term growth. Moving on to the details of the P&L. Total company adjusted gross margin in the quarter came in at 53.9%, up 760 basis points from Q4 of the prior year. For the full year, adjusted gross margin was 51.2%, up 480 basis points versus the prior year. For both the fourth quarter and the full year, the increase in gross margin was due to the same drivers as those for our adjusted operating margin. Adjusted SG&A in the quarter was 17% of revenue, a decrease of 60 basis points versus Q4 2019 due to the strong volume leverage. For the full year, adjusted SG&A was 17.9% of revenue, an improvement of 120 basis points compared to 2019. Total R&D expense was $376 million for Q4 and $1.2 billion for the full year, representing growth of 44% and 18%, respectively, reflecting our increased investments in high-impact innovation. Looking at our results below the line for the quarter, our net interest expense was $134 million, $37 million higher than Q4 last year, primarily due to a higher level of debt. Net interest expense for the full year was $488 million, an increase of $37 million from 2019. Adjusted other income and expense was a net expense in the quarter of approximately $3 million, $19 million lower than Q4 2019, mainly due to changes in non-operating FX. For the full year, adjusted other income and expense was a net income of $40 million, which was $32 million lower than the prior year. Our adjusted tax rate in the quarter was 16%, up 430 basis points versus Q4 last year. For the full year, the adjusted tax rate was 14.3% or 320 basis points higher than 2019. The increase in the tax rate was due to the substantial increase in pre-tax profit year-over-year, coming in at our marginal tax rate. Average diluted shares were 400 million in Q4, about 2 million lower year-over-year, driven by the net impact of option dilution and share repurchases. For the full year, the average diluted shares were 399 million. Turning to cash flow and the balance sheet. Cash flow was another great highlight for the year. We significantly increased net capital expenditure to accelerate the execution of our growth strategy while delivering a 67% increase in free cash flow. Cash flow from continuing operations was $8.3 billion, net capital expenditures were $1.5 billion, and free cash flow was $6.8 billion. During 2020, we returned approximately $1.8 billion of capital to shareholders through stock buybacks and dividends, and we ended Q4 with approximately $10.3 billion in cash and $21.7 billion of total debt. Our leverage ratio at the end of the quarter was 2.1 times gross debt to adjusted EBITDA and 1.1 times on a net debt basis. Concluding my comments on our total company performance, adjusted ROIC was 17.9%, up 610 basis points from Q4 last year as we generated exceptional returns in 2020. Now I'll provide some color on the performance of our four business segments. And similar to last quarter, I'll start with some framing thoughts on the impacts that our COVID-19 response had on our segment results. From a revenue standpoint, the majority of the COVID-19 response revenue is recognized in Life Science Solutions. This is revenue from testing kits, instruments, sample preparation, and reagents for lab-developed tests recognized in the genetic sciences and biosciences businesses. This segment also includes revenue from vaccine and therapy production supplies recognized in the bioproduction and biosciences businesses. The Specialty Diagnostics segment includes revenue in the clinical diagnostics business from the molecular controls that go into testing kits. We also recognized revenue for viral transport media in the microbiology business and for tests and PPE in the healthcare market channel. The Laboratory Products and Services segment includes revenue from vaccine and therapy services from our Pharma Services business. This segment also includes revenue for PPE in the research and safety market channel as well as plastics used in testing workflows and cold storage equipment manufactured by our lab products business. From a margin standpoint, the impact of COVID-19 differed across the segments based on the scale of the response revenue and the different levels of profitability on that revenue. In addition, during the quarter, we continued to make strategic investments across all of our businesses. This included investments in our colleagues in terms of incentive compensation and recognition, as well as commercial, R&D, and production capability investments. The size of those investments does not necessarily align with the COVID-19 response revenue in each segment, and so that does skew some of the reported segment margins. So a lot of moving parts from a segment margin standpoint reflect the very active management of the company, successfully navigating the current environment and positioning the company for an even brighter future. Moving on to the segment details, starting with Life Science Solutions. In Q4, reported revenue increased 138%, and organic revenue growth was 134%. In the quarter, we saw exceptionally strong growth in our genetic sciences business and biosciences and bioproduction businesses. For the full year, reported and organic revenue growth was 77%. Q4 adjusted operating income in Life Science Solutions increased 236%, and adjusted operating margin was 53.1%, up 16 percentage points year-over-year. In the quarter, we drove very strong volume pull-through and positive business mix, and we continued to make strategic investments across all businesses in this segment. We also had a tailwind on margins from FX. For the full year, adjusted operating income increased 150%, and adjusted operating margin was 50.2%, an increase of 15 percentage points over 2019. In the Analytical Instruments segment, reported revenue increased 8% in Q4, and organic revenue growth was 5%. End markets for chemical analysis remain muted, but this was more than offset by strong growth in both chromatography and mass spectrometry and the materials and structural analysis businesses. We continued to see increased levels of customer activity in these businesses and drove strong commercial execution. For the full year, reported revenue in the segment declined 7%, and organic revenue decreased 8%. Q4 adjusted operating income in Analytical Instruments decreased 16%, and adjusted operating margin was 20.2%, down 580 basis points year-over-year. In the quarter, we drove very strong productivity that was more than offset by the strategic investments that I mentioned earlier. We also had a headwind to margins from FX in this segment. For the full year, adjusted operating income decreased 37%, and adjusted operating margin was 15.8%, a decline of 730 basis points versus the prior year. Turning to the Specialty Diagnostics segment. In Q4, reported revenue increased by 109%. Organic revenue growth was 107%. Our COVID-19 response revenue was significant in the quarter, enabling us to deliver very strong growth in our microbiology, healthcare market channel, and clinical diagnostics businesses. The level of routine diagnostics testing activity was higher in Q4 than Q3, but still remains below pre-pandemic levels, particularly for our immunodiagnostics and transplant diagnostics businesses. For the full year, reported revenue was 44% higher than the prior year and organic revenue growth was 48%. Adjusted operating income increased 134% in the quarter, and adjusted operating margin was 26.4%, up 270 basis points from the prior year. In Q4, we drove very strong volume leverage, which was partially offset by negative business mix and strategic investments. For the full year, adjusted operating income increased 47%, and adjusted operating margin was 25.6%, an improvement of 60 basis points versus the prior year. Finally, in the Laboratory Products and Services segment, Q4 reported revenue increased 28%. Organic revenue growth was 25%. In the quarter, we saw strong growth in all our businesses in this segment, including the research and safety market channel, laboratory products, and pharma services. For the full year, reported revenue was 16% higher than 2019 and organic revenue growth was 13%. In Q4, adjusted operating income in the segment decreased 13%, and adjusted operating margin was 9.4%, which is 440 basis points lower than the prior year. In the quarter, strong productivity and volume leverage was more than offset by unfavorable business mix and strategic investments. For the full year, adjusted operating income declined 4%, and adjusted operating margin was 10.4%, 210 basis points lower than the prior year. With that, I'll turn to our initial 2021 guidance. We're starting the year with annual guidance of 7% organic growth and adjusted EPS of $21.62, which will result in 11% growth over 2020. So another year of very strong financial performance. The dynamics around the pandemic continue to be fluid, but we thought it was important to give you our initial view of the full year along with the associated assumptions to help frame how we're positioning the company for another successful year. We've chosen to go with a point outlook rather than a range because there are a multitude of different potential customer demand outcomes for the year, especially around testing. We remain incredibly well-positioned to operate with speed at scale to uniquely serve our customers under any demand scenario that actually plays out this year. At the same time, we'll continue to invest aggressively in very exciting near- and long-term growth opportunities while delivering exceptional financial performance for our shareholders. Just as we did in 2020, we will maximize the opportunity to drive short- and long-term value for all our stakeholders. Let me now provide you with the assumptions behind our initial guidance. In terms of revenue, our guidance is $35.1 billion, which represents approximately 9% reported growth over 2020, including 7% organic growth. There are two key elements to the organic growth assumption. First, the base business. Here, we're assuming 7% organic growth in 2021. The second element is the COVID-19 response. Here, we're starting the year with an assumption of $7.1 billion of revenue for 2021. This reflects testing-related revenue that's roughly the same as we delivered in 2020, plus approximately $1 billion of vaccine therapy-related revenue in 2021, which is double the level we generated last year. Let me give you some color on the phasing of the COVID-19 response revenue. We're assuming that vaccine and therapy revenue is fairly linear in 2021. The testing-related revenue is assumed to be very front-end loaded, with Q1 levels similar to Q4 2020. Our guidance then assumes testing demand may begin to moderate in Q2 and potentially moderate further as the year progresses. Should the pandemic be longer lasting and the need for testing maintained, then there is sizable upside to the $7.1 billion, particularly in the second half of the year. We're really well-positioned to support our customers should demand levels be higher than this initial guidance assumption. We'll have more clarity on the actual second half demand levels later in the year. Regarding FX, we're assuming a year-over-year tailwind of approximately $400 million of revenue or 1.2%, and $0.14 of adjusted EPS or 1%. We're assuming that acquisitions will contribute approximately $125 million to our reported revenue growth in 2021. The initial guidance assumes an adjusted operating margin of 29.8%, 10 basis points higher than last year. Our PPI Business System will continue to drive strong volume pull-through and productivity benefits, which will be partially offset by significant strategic investments adding to those made in 2020 that Marc outlined earlier. Moving below the line, we expect net interest expense in 2021 to be approximately $470 million. This is $20 million lower than 2020 due to lower average net debt. It includes the impact of the $2.6 billion debt paydown that we completed in January. We're assuming adjusted other net income will be about $8 million, lower by $32 million from 2020, mainly due to changes in non-operating FX. We expect the adjusted income tax rate to be 14% in 2021. The improvement from our 14.3% prior year tax rate is primarily driven by the benefits of our tax planning initiatives. We're assuming net capital expenditures of approximately $2.2 billion to $2.4 billion. The midpoint represents an increased investment of $800 million over 2020, driven by capacity and capability expansions in our pharma services, bioproduction, biosciences, and laboratory products businesses. Free cash flow is expected to be approximately $7 billion in 2021. The increase over 2020 is primarily driven by expected earnings growth, partially offset by the increase in capital expenditure investments. Our guidance includes $2.8 billion of capital deployment. This consists of $1.5 billion of share buybacks, which we completed in January; $880 million for the recently completed acquisition of Novasep's European viral vector business; and it assumes approximately $400 million of capital returned to shareholders this year through dividends. We estimate that the full year average diluted share count will be approximately 398 million shares, and our guidance does not assume any future acquisitions or divestitures. It also does not include the acquisition of Mesa Biotech, which is expected to close later in Q1. Lastly, I wanted to touch on quarterly phasing for the year, as there are several factors to consider. First, note that we have three extra selling days in Q1 and four fewer days in Q4 in 2021, resulting in one less day for the full year. Then as I mentioned earlier, the COVID-19 response revenue included in the initial guidance is more significantly weighted to the first half of the year. As a reminder, the 2020 comparisons are significantly easier in the first half of the year. So a lot of dynamics impacting the top-line growth by quarter, with very strong growth expected in the beginning of the year. From an adjusted EPS standpoint, we're expecting approximately 54% of the year's total in the first half of the year and 46% in the second half, reflecting very strong operational execution throughout the year. From a near-term standpoint, taking all of these factors into account, we're expecting Q1 organic growth and operating margin profiles to be similar to Q4 2020. So at a high level, we're starting the year with guidance of 7% organic revenue growth and 11% adjusted EPS growth, a continuation of our excellent long-term financial performance track record. As always, we'll strive to deliver the best possible results, and I look forward to updating you on our progress as we go through the year. With that, I'll turn it back to Ken.

Thanks, Stephen. Operator, we're ready to open it up for Q&A.

I'll start off by wishing Ken all the best, and great to work with you over the years. Marc, your implied testing drop-off is steeper than we've heard from others like Hologic and Abbott. I'm curious if you could talk a little bit more about that dynamic in particular. Is that just a function of the non-automated PCR testing and maybe a lower installed base of the Amplitude? And then I'm curious about Mesa Bio, thoughts on entering an increasingly crowded point-of-care market. And are you planning to materially scale the antigen test? And how could that factor into the outlook?

Tycho, thanks for the question. Yes, I'm much more optimistic than the way you frame the question, right? So if I think about our PCR installed base and the assumptions, we have really strong line of sight to the first quarter, reasonable line of sight to the second quarter. After that, our customers just don't know, right? So we made an assumption base that we're going to see incredibly strong demand in the first quarter, and that is going to drop off somewhat in Q2. And then we made a much more conservative assumption. But the way the pandemic has played out, there are many scenarios where I see testing demand being very robust for a long period of time. The truth is, this pandemic is going to be around in some form around the world, and doctors are going to want to know whether or not a patient or a person has COVID, right? So I think you'll see as the year plays out, there are scenarios well above the testing assumption. Amplitude demand has been extraordinarily robust. Our installed base is growing, and that's been a nice adder to the growth that we saw in Q4 and the strong momentum we expect. Mesa is very exciting, right? When you think about what we've learned throughout the pandemic is that PCR testing is truly the gold standard. The accuracy that you get is super relevant, and Mesa's technology gets you a result in 30 minutes with PCR capability, and it gives you that confidence in the accuracy. The way we think about it is there are a number of applications that are very relevant to have that rapid testing. Pharmacies would be an obvious example. The sports leagues have been using this technology. So those will be examples of where it is, and that obviously will be additive to our capabilities. It's not assumed in our guidance at this point. So thank you, Tycho.

And then one follow-up for Stephen, just on the margins, understanding the 29.8% operating margin guidance. As we think about the gives and takes around the COVID tailwinds, can you maybe just talk as we think about COVID eventually wearing off, how much you expect to retain in terms of some of the margin uplift you've seen over the past year?

Yes. So when I think about the margin profile that's embedded in this guide, as I mentioned, Q1 is similar to Q4 of 2020 and then the other three quarters are roughly the same in terms of margin profile. It's a combination of kind of lost contribution from the testing revenue drop-off and then the timing of investments. So that gives you an indication.

I want to congratulate Ken and Raf. Stephen, I wanted to follow up on Tycho's comment. For much of late 2020, many investors were concerned that Thermo's significant COVID-related boost would lead to challenging comparisons and hinder earnings growth. Obviously, that proved to be unfounded in 2021. However, this raises questions about 2022. I understand it's early to provide definitive answers due to the uncertainty, but all my questions from investors this morning are about the strong guidance for 2021 and how we might approach 2022. Could you share any initial thoughts on the potential for earnings growth in 2022?

I've been with the company for a while, and while I haven’t typically started off with next year’s guidance in the opening remarks, it’s an important question. Here’s how I view it: First, consider how we've operated throughout 2020, which involved significant growth in our financial performance and cash flow, alongside a notable increase in our reinvestment rate. The pandemic opened up new opportunities for us as we adapted and strengthened our relationships. This allowed us to add $1 billion in reinvestment to the business beyond our usual annual increases, and we plan to increase that again in 2021. What does this mean for the future? It positions us for faster growth, which will drive earnings from our expanded business activities. Many of our COVID-related investments will extend into other applications, particularly vaccines and therapies, which we expect will remain important into 2022, although their relevance may wane eventually. The capacity we developed will then transition to non-COVID-related projects. Additionally, the growth in our installed base for molecular diagnostics enhances our potential in the market, as we significantly boosted our capacity last year. Unlike others in the industry who faced stagnant results due to manufacturing constraints, we managed to ramp up production quickly. We're optimistic about our future prospects, and as we get closer to 2022, we’ll have a clearer picture. Overall, I’m very confident about the long-term outlook for the company.

Great. I understand these discussions often revolve around recent performance. You already addressed my question about molecular diagnostics. I have one quick follow-up. Just to clarify, regarding the increase in capital expenditures in 2021, we expect those levels to decrease in 2022 and beyond, correct? That isn't going to be a new baseline for capital spending.

No, we would expect it to start to wind back down over time. If new opportunities arise, we will support them because we want to capture the returns. The increases in 2020 and 2021 support the opportunities that emerge and the long-term acceleration of our growth.

Yes. I think it's kind of a long, long-term modeling. It's really around about 3% to 3.5% of revenue is a good way to think about the profile of the company right now.

And also, congratulations, Ken; congrats, Raf. Well deserved. So wanted to dig into the guidance a little bit more. So around the assumption for vaccine therapeutic revenue fairly linear throughout the year, though we're obviously seeing the vaccine manufacturers scaling capacity into 2021. So could you just give a little bit more color around the framework behind the assumption? And are there any projects that you think drop off throughout the year?

So I think one framing is we were at that run rate already in Q4. So this is kind of how we're seeing the year play out with a continuation of where we are. So a very high level of support for our customers. Can you just clarify the last part of your question about the take?

Yes. Are there any projects that you think drop off throughout the year?

Yes, we have supported a lot of development work, and while some of those therapies or vaccines may not succeed, those projects will conclude.

Before I get into it, once again, Ken, best wishes on the next stage. You deserve all the best, and congrats to Raf. We have always enjoyed working with you both and look forward to working with you both. Well, at least Raf moving forward, and hearing about what Ken is doing on the beach. So first topic is, again, on guidance. 2021 guidance assumes a base business growth rate of 7%. According to our math, this implies a 2-year stacked growth rate of around 3.5%, which is well below your longer-term growth rate target and also the Q4 core growth rate. How would you characterize the conservatism embedded into 2021 guidance, or is this kind of balancing early in the year conservatism, which is typical for you with maybe just seeing some increased headwinds related to COVID-19 restrictions in certain parts of your business?

Yes, Doug. So when I think about the base business, I feel good about the implied step-up in growth that we saw from Q4 for the full year, right? Going from roughly 5% growth in the fourth quarter to 7% growth in the base business for the full year. What's assumed in there is still there's some level of disruption based on the pandemic. Let me just visualize it. Our Specialty Diagnostics business, routine doctor business are still well down, right? So there are parts of the business where you don't see that recovery for a while. But we still feel confident in growing at a good rate. I see scenarios that are above the 7%, right? So it's not as if that's the only scenario that plays out. So I don't know if I think it's an appropriate start. I don't know if it's conservative or not, but we measure ourselves at the end of the year, did we do a great job? So we're going to look at how did everybody else in the industry report, and we need to make sure that we're gaining market share. If the 7% reflects market share gains, then we're going to be satisfied. If there's more opportunity to go faster than that, then you're going to see us deliver it.

Congrats to Ken and Raf. Marc, maybe a big picture question for you. Is there a view that the base business should be accelerating or perhaps has gotten stronger emerging from the pandemic? Some of the feedback we've been getting is higher installed base, biopharma accelerating. So perhaps some thoughts on what the base? I know the LRP pre-pandemic was 5 to 7. Is that LRP itself that math changing because the business is emerging more strongly from the pandemic?

Yes, Vijay, thank you for your question. We discussed our long-term vision during the Q3 call and the Analyst Meeting in September. Our guiding principle throughout the pandemic has been to make decisions and investments that will position us for a brighter future. The pandemic has also created new opportunities in the market. As we move forward, we are positioning the company to emerge from the pandemic as a faster-growing entity than before, though we will determine the exact figures over time. Our business in pharma and biotech continues to expand, making it our fastest-growing segment. This growth is driven by market demand, our value proposition, increased investments in innovation, and our focus on emerging markets, all of which will contribute to strong growth in the future. I am very optimistic about our long-term potential for gaining market share.

Ken, obviously, have been great working with you and best of luck. The same thing with Raf, look forward to going forward. Marc, a quick plug, things are looking up for our jets here. So I wanted to ask a first question on vaccine and therapeutics. I know you've addressed a few comments here thus far. I think on the last call, you discussed this $1 billion revenue cumulatively looking at 4Q '21 and '22. I know to Derik's question, you addressed the outlook of some color on '22. I'm just wondering if you can help us think through kind of the durability. Obviously, there's a lot of moving pieces, but this $1 billion you're guiding for '21, presumably, there's going to be a pretty decent tail of this vaccine opportunity. Any way to help us think through that opportunity and how it breaks down between your tools business and PPI?

So Dan, thanks for the question, and the Jets, not the best of years. But at least we were focused on a lot of things at Thermo Fisher. So I didn't suffer the pain too much. When I think about vaccines and therapies, our philosophy, which is to articulate the numbers and the outlook on what you can see and not create a lot of hype around things. So when we started out some months ago, we talked about a $1 billion opportunity in total. That was contracted revenue that we saw. As the pandemic continued, our position continued, as we won more and more parts of the business, even what we committed to, if it all went to zero at the end of this upcoming year, it would be $1.5 billion because we did $0.5 billion last year, $1 billion this year. Based on what we see with the pandemic and what our customers are telling us, we expect demand for COVID-19 therapies and vaccines to be very substantial in '22 and likely to have some level of revenue going into '23 and maybe even longer. It’s going to be a large contribution based on the strength of our bioproduction business and our pharma services capability. So thank you for the question. Let me wrap here with a few things. First, as all of our analysts expressed and on behalf of all 80,000 colleagues, Ken, thank you for a job incredibly well done and wishing you the happiest of retirements. It's been awesome. From a company perspective, we delivered an exceptional year, and we're even more excited about the opportunities ahead of us. We're looking forward to updating you during the course of 2021. As always, thank you for your ongoing support of Thermo Fisher Scientific. Thanks, everyone.